It is either the beginning of the Donald Trump inspired US economic miracle – or it’s the correction that Wall Street HAD to have?

Either way, it caused intense nervousness among investors and governments around the world.

But what triggered the fall in the US Stockmarket?

The answer…0.2 percent. You can blame this all on 0.2 percent.

0.2 percent was the difference between what was forecasted and what was the actual result for US wages growth which was reported last Friday. The market expected 2.7 percent, the result was 2.9 percent. 0.2 percent…that is all.

But that 0.2 percent difference was enough to set off a 650 point fall (2.5 percent) in the Dow Jones on Friday, and another 1,175 fall (4.6 percent) on Monday US time.

It was the biggest one-day fall for the market in almost seven years. Almost $490 billion wiped off the value of US equities in just two days.

In Australia – $90 billion was gone in two days.

When the All Ordinaries opened on Tuesday morning, the green writing instantly turned all red. It brought back memories of the 2008 GFC or Black Monday in 1987. Many shareholders thought they were in real trouble. But as I have said many, many times this week – this is not the case.

We are not in the middle of another GFC. We did not witness another Black Monday. It was a simply healthy correction of the market that was needed.

Now – I’ve just mentioned the reason for this whole schmozzle. And it was 0.2 percent. Let me explain further…

The 0.2 percent is so important because its evidence of the US’s strong economic growth – which is creating more jobs – and putting pressure on wages to rise. This means then inflation is likely to rise and with it – interest rates.

If interest rates start to rise, then banks and financial stocks come under pressure, hence the sell-off.

Now, last week, Janet Yellen, in her last appearance as the head of the US Federal Reserve, hinted that the economy was improving enough to perhaps speed up the timeline for interest rate hikes as it reels in some of that extra cash – so there you go. More evidence that America’s economy is doing quite well. Shouldn’t we be jumping for joy about this? The economy is strong! Rejoice!

But it seems many are worried what a rise in interest rates means. I have warned many times about the likelihood of interest rates in Australia and what it will mean for already cash-strapped households.

Now – the US economic cycle is more advanced than Australia’s. And it’s being spurred on even further by Trump’s corporate tax cuts and other pro-growth policies that – in Australia – remain stuck in the Senate, unlikely to pass anytime soon.

Now – the key to understanding the fundamentals of all of this is employment numbers. It was only a matter of weeks ago, Trump tweeted that black unemployment was the “lowest ever recorded in our country”. And, I will say again, that is something to boast about.

Remember – supply and demand. With more people in jobs, its harder for employers to find people to work so it means they are offered incentives, a large pay packets, benefits, etc. We only have to look bak to the mining boom to see an example of this.

Cooks and painters were paid more than $150,000 a year to work in mining areas. This is what I mean. The stronger the demand for work is, the more likely we will see wages rise. And its exactly what has happened in the US.

People are working more, supply and demand is greater and therefore, wages are rising. And the 0.2 percent difference between what was forecasted and the actual result…well, to be honest – it’s not a bad thing.

We are starting to see the same thing happen again in Australia; unemployment right now is at 5.4 per cent. And with anything under 5 percent considered close to be full employment, wages are expected soon to rise.

But if interest rates have to rise to head off inflation (long term, inflation has historically been a bad thing for job creation), it might not be a bad thing.

As I mentioned, in Australia, wages have not yet started to grow, but the signs are there.

If wages do rise, the Reserve Bank will not be far away from lifting interest rates. Money markets right now indicate the first rise in rates will be February next year, but if wages show signs of rising sooner, then it could be earlier than that.

Economists right now are divided about the strength of Australia’s economy and when those rate rises will arrive.

One group points to the cooling in house prices and construction, and say this will be enough to slow job creation this year; leading to low wages growth, low inflation and no interest rate rises this year.

The other group says the housing cycle might slow, but it will not go away because of Australia’s rising population. They say wages growth will continue as more jobs are created and, so long as the US economy does not fall off a cliff, commodity prices and Australia’s economic growth will also pick up.

Either way, you have to keep watching this economic debate – for your job, mortgage rate, business and superannuation fund depends upon it.

9News –

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About The Author

Ross Greenwood is the Nine Network’s business and finance editor, and hosts Sydney's top-rating radio program, Money News, for 2GB, 4BC. 3AW and all networked stations across the Macquarie Media group.
He appears daily on the Today Show - notably for his Money Minute - and Nine News.